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The Honolulu Advertiser
Posted on: Wednesday, May 26, 2010

Bernanke warns of political meddling


By JEANNINE AVERSA and TOMOKO A. HOSAKA
Associated Press

Hawaii news photo - The Honolulu Advertiser

Federal Reserve Board Chairman Ben Bernanke consults with Bank of Japan Gov. Masaaki Shirakawa at a central banking conference in Tokyo.

ITSUO INOUYE | Associated Press

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TOKYO The Federal Reserve and other central banks must protect their ability to make key economic decisions free from political interference, Fed Chairman Ben Bernanke said today.

As governments move ahead on reforms to prevent another global financial crisis like the one in 2008, Bernanke stressed the importance of the Fed and central banks in other countries maintaining their independence over setting interest rates, known as monetary policy.

The Fed, for instance, often must make decisions such as boosting rates to keep inflation in check that are unpopular with politicians but are necessary for a healthy economy.

Politicians generally prefer holding interest rates low, which stimulate the economy and hiring.

"Such gains may be popular at first, and thus helpful in an election campaign, but they are not sustainable and soon evaporate, leaving behind inflationary pressures that worsen the economy's long-term prospects," Bernanke said in a speech at a conference in Tokyo on the future of central banking in a globalized economy.

"Thus political interference in monetary policy can generate undesirable boom-bust cycles that ultimately lead to both a less stable economy and higher inflation," he said.

Bernanke's comments come as Congress edges closer to completing action on revamping U.S. financial rules, and subjecting the Fed to more oversight.

A provision contained in a House-passed bill doesn't specifically carve out monetary policy from congressional audits as current law does. However, the House bill says the audits shouldn't interfere or dictate the setting of interest rates. A Senate-passed bill, on the other hand, provides for a one-time audit of the Fed's emergency lending program. Congress must reconcile the two bills before a final vote is taken.

Bernanke said the Fed's emergency loan program to banks also should be free of political interference. For years, the Fed has made low-cost loans to banks when they couldn't get financing elsewhere. The identities of banks aren't made public for fear of causing a run on the institution and defeating the purpose of the backstop.